This is a precarious time for regional banks. At the core of the issue has been margin pressure, with a surge in rates at the short end of the curve, and the longer end of the curve not keeping pace. This is so-called rate inversion. This has led to banks fighting for deposit dollars and having to pay up, weighing on margins between what it pays customers for deposits and what it lends those funds out in the form of loans.
We think the regional banks space is widely setting up for investment after a very tough year or so. We think rate increases are coming to an end, and so the sharp increases in the cost of funds should stabilize while future loans are issued at a higher rates moving forward. In short, we see margins expanding again moving forward.
One name that is now yielding 5%, and likely to continue its history of dividend growth, is Community Trust Bancorp, Inc. (CTBI). We love the dividend history here.
The CTBI dividend has been raised every year, including with the most recent dividend payment. Pay no attention to the movement in shares week to week, buy this for income and the capital gains will follow when rates start to ease, in our opinion. You will never catch the full bottom, but we think for the long-term hold this is a solid income name to start buying. While the near-term situation will be volatile, this is an investment that should pay off. This is evidenced by strong earnings that were just reported.
Q3 headline earnings
On the back of solid loan growth, deposit strength, and margin power, the bank reported a Q3 that saw improvement in earnings year-over-year and from the sequential quarter. Folks, that is rare in this macro environment. In Q3, the company reported a top line that was above consensus estimates, and nearly flat from a year ago. With the present quarter’s revenues of $58.9 million, the company registered a 0.8% increase in this metric year-over-year. Many of the metrics we follow have improved, which says a lot, since this environment has been tough.
Loan loss provisions are minimal despite the macro situation. In Q3, provisions were down. This bucks the trend we have seen for many other banks. Provision for credit losses at $1.9 million for the quarter decreased $0.1 million from the prior quarter and $0.5 million from prior year same quarter.
Now, margins have been the sticking point for banks. But the net interest margin is solid as well for this bank, and we think the margins will be troughing in Q4. They dipped from a year ago and the sequential quarter, but minimally. Net interest income for the quarter of $43.1 million was $0.1 million above the prior quarter but $0.4 million down from a year ago. Net interest margin decreased 8 basis points from the sequential quarter and 9 basis points from a year ago.
Overall Community Trust Bancorp reported net income of $20.6 million, or $1.15 per share, which was a beat versus consensus, and it was up from a year ago, and up from the sequential quarter. While margins dipped, overall margin income was up and fee income helped. This was a big win, as EPS was up $0.06 from a year ago.
Loans continue to increase
Despite all of the fear, loan demand is still robust. The loan portfolio increased $55.3 million, an annualized 5.6%, from the start of Q3, and it was up $354.4 million, or 9.8%, from a year ago. This is a big win. Further, deposits were up too. Total deposits, including repurchase agreements, jumped $114.8 million, or an annualized 9.6% from the start of Q3, and deposits were up $95.3 million, or 2.0% from a year ago.
So margins look to stabilize, loans are up, and deposits are up, with strong EPS performance. What about the quality of the assets?
Asset quality metrics improve
Despite everything going on with banks and rates over the last 18 months, this bank has seen relative strength in asset quality metrics. However, this was one negative in the quarter, as Community Trust Bancorp, Inc. saw an increase in charge-offs and nonperforming assets. While this could be tied to a single customer or two that has fallen on tough times, it needs to be monitored. There were net loan charge-offs of $1.2 million, or 0.12% of average loans annualized, versus $0.7 million, or 0.07% of average loans annualized in the sequential quarter. This is a notable increase, but could be one single mortgage.
Further, total nonperforming loans increased to $13.0 million at the end of the quarter, rising from $11.7 million to start the quarter. However, these are down from a year ago. What is more, nonperforming assets were $15.2 million and decreased $0.4 million from last year.
Overall, we would say this performance was mixed, but we see incredible return and efficiency metrics here. The return on average assets, is at a one year high at 1.46%, up from 1.41% last quarter. There was also a 48 basis point increase on the returns on average equity to 12.30%. Further, the efficient ratio is superb at 52.66%, the best it has been in a year. Finally, with the selloff in shares, the valuation is attractive here. Book value is $36.30, and shares are trading at $23.80. This is a 34% discount-to-book.
Community Trust Bancorp, Inc. shares have been crushed and are now accidentally high-yielding. This is a serial dividend raiser, that is managing to grow EPS in this environment with return metrics at one year highs. This is a hidden gem under the radar. Buy the stock for income.
Read the full article here